My Company

By Nick Thornton

In the legislative flurry before Congress broke for summer vacation, bipartisan legislation was introduced that would provide nondiscrimination relief to frozen pension plans.

Reps. Pat Tiberi, R-Ohio, and Richard Neal, D-Mass., both on the House Ways and Means Committee, cosponsored the bill, which would provide that frozen pension plans were in compliance with nondiscrimination or minimum participation requirements so long as the plan was in compliance when it was closed to new enrollees.

In order for sponsors to receive the full extent of the tax breaks from their defined benefit plans, three specific criteria must be met: nondiscrimination, minimum coverage, and minimum participation requirements, according to the Employee Benefits Research Institute.

Congress established the criteria in the Tax Reform Act of 1986, as a way to assure that pension benefits reached the broadest set of workers possible. The criteria also prevent sponsors from discriminating against lower-wage earners by distributing a disproportionate share of benefits to higher earners.

But an unintended consequence of the phasing out of defined benefit plans has left many sponsors with unexpected regulatory liability.

As plans have been frozen to new entrants, and as companies experience natural employee turnover rates, eventually some frozen plans end up having a disproportionately high ratio of highly compensated employees.

And if that happens, frozen plans can end up failing nondiscrimination tests, disqualifying them from the write-offs available from their plans.

The proposed legislation would allow frozen plans to retain their qualified status so long as they were in compliance when the plans were frozen.

In some cases frozen defined benefit plans are aggregated with defined contribution plans to satisfy non-discrimination requirements. But that could ultimately put defined contribution plans at risk as well.

At the end of 2013, the IRS announced temporary relief for defined benefit plans with nondiscrimination exposure while potential changes to the rules were considered.

Recently, Judy Diamond Associates, a retirement plan data publisher and a division of BenefitPro’s parent company, Summit Professional Networks, found that 57,277 401(k) plans failed their most recent nondiscrimination tests.